Key Tronic (NASDAQ:KTCC) reported first-quarter financial results on Tuesday. The transcript from the company’s first-quarter earnings call has been provided below.
This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.
View the webcast at https://event.webcasts.com/starthere.jsp?ei=1777724&tp_key=d4b5422ae8
Summary
Key Tronic reported a Q1 fiscal 2027 revenue of $98.7 million, consistent with the previous year, but faced significant constraints due to tightened credit availability and supply chain issues, delaying $18 million in shipments.
The company experienced a net loss of $7.5 million, or $0.69 per share, compared to a loss of $2.3 million, or $0.21 per share, a year ago, with gross margins dropping from 8.4% to 2.5% year-over-year due to supply chain challenges and inventory sales issues.
Despite current financial challenges, Key Tronic’s backlog increased by 76% year-over-year to $245.9 million, reflecting strong customer demand, and the company is focusing on cost reductions, including streamlining its U.S.-based workforce, to improve margins.
Strategic initiatives include expanding manufacturing capabilities in Vietnam and the U.S., winning new business valued at over $60 million annually, and addressing supply chain financing constraints with new capital sources.
Management did not provide specific guidance for the next quarter due to ongoing macroeconomic and capital environment challenges but expressed optimism about a return to profitability in the second half of fiscal 2027.
Full Transcript
OPERATOR
Good day and welcome to the Key Tronic FY 2027 Q1 investor call. Today’s conference is being recorded. After the presentation, we will begin the question and answer period. At this time, I’d like to turn the call over to Tony Voorhees. Please go ahead.
Tony Voorhees, CPA (Executive Vice President of Administration, CFO, and Treasurer)
Good afternoon everyone. I am Tony Voorhees, Chief Financial Officer of Key Tronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here at our Spokane, Washington headquarters is Brett Larsen, our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call we might make projections or other forward-looking statements regarding future events or the Company’s future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the Company has filed with the SEC, specifically our latest 10-K and quarterly 10-Qs.
Please note that on this call we will discuss historical, financial, and other statistical information regarding our business and operations. Some of this information is included in today’s press release. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast and the link can be found on our investor relations website. In addition, the slides, together with a recorded version of this call, will be available on the Investor Relations section of our website.
We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and the reconciliations to the most directly comparable GAAP measures are provided in today’s press release, which is posted to the Investor Relations section of our website. Our financial performance in Q1 was clearly below where we expect to operate. Revenue remained constrained, margins were pressured, and we reported another quarterly loss. At the same time, customer demand remains strong, our backlog has grown significantly, and we are taking decisive actions to improve our cost structure and address the constraints that limited our performance during the quarter. We believe those actions, together with the new business we are winning, provide a clear path toward improved financial performance as we move through fiscal 2027.
For the first quarter of fiscal 2027, we reported total revenue of 98.7 million compared to 98.8 million in the same period of fiscal 2026. Revenue for the first quarter of fiscal year 2027 continued to be constrained by tightening credit availability and liquidity pressures across the global supply chain. These supply chain financing constraints delayed approximately 18 million of our shipments during the quarter, mostly involving programs manufactured in Mexico and the U.S. Importantly, we view these delays as primarily a constraint on our ability to convert demand into revenue rather than a lack of customer demand.
Our backlog was 245.9 million in the first quarter of fiscal year 2027, up 76% from the same period in fiscal year 2026. Revenue from our Vietnam-based production continued to grow, driven by medical device and consumer products programs. We’re actively working with our customers and suppliers and exploring new sources of capital to support growth and to ease supply chain financing constraints in future periods. Gross margin was 2.5% in the first quarter of fiscal year 2027 compared to 8.4% in the same period of fiscal year 2026. There were several significant pressures on Q1 profitability. Production delays caused by supply chain financing challenges resulted in excess labor costs and operating inefficiencies at our Mexico and U.S. facilities. Gross margin in the first quarter of fiscal 2027 was further reduced by approximately 6 million of inventory sales with no margin contribution and 4.7 million of manufacturing cost variances that were recognized in cost of goods sold rather than reflected in inventory due to U.S. GAAP inventory valuation requirements.
Our operating margin was negative 4.2% in the first quarter of fiscal year 2027 compared to negative 0.6% in the same period of fiscal year 2026. The decline in operating margin for the first quarter of fiscal year 2027 reflects the drop in gross margin as well as approximately 0.5 million in write-offs of bad debt. These adverse impacts were partially offset by 3.2 million insurance recovery related to a roof replacement in our Mississippi facility.
The important point looking forward is that we are actively addressing the cost structure behind these results. We are streamlining our U.S.-based workforce, which is expected to reduce labor costs by approximately 8 million annually. As revenue improves and these cost actions take hold, we expect margins to improve in the coming quarters. The delayed shipments and associated drop in our revenue and margins had a big impact on our bottom line. Our net loss was 7.5 million, or 0.69 per share, for the first quarter of fiscal year 2027 compared to a net loss of 2.3 million, or 0.21 per share, for the same period of fiscal year 2026. Our adjusted net loss was 7.9 million, or 0.72 per diluted share, for the first quarter of fiscal year 2027 compared to adjusted net loss of 1.1 million, or 0.10 per diluted share, for the same period of fiscal year 2026.
Our focus on operating discipline continues to support a strong balance sheet. Our inventory at the first quarter of fiscal 2027 was up 6.4 million, or by 6.6% from a year ago, reflecting our preparation for growth in coming periods. Our current ratio was 1.9 to 1 compared to 2.4 to 1 from a year ago. At the same time, accounts receivable DSOs were at 75 days compared to 81 days a year ago, reflecting stronger collection on receivables. Capital expenditures in the first quarter of fiscal 2027 were 1.6 million, and we expect total capital expenditures for the full year of approximately 7 to 10 million, reflecting investments in facilities and new innovative production equipment and automation. Given the current environment, capital allocation and working capital discipline remain important priorities for us. We intend to be selective with investment while continuing to support the programs and capabilities that we believe will drive future returns.
As we move further into fiscal 2027, there are several reasons we remain positive about the remainder of the fiscal year. First, demand remains strong, activity with several long-standing customers is improving, and new programs are ramping. Our backlog reached 245.9 million, up 76% year over year. Second, we continue to win meaningful new business, and our expanded U.S. and Vietnam capacity is generating increased customer interest. Third, our manufacturing footprint is increasingly aligned with where our customers want to produce.
Our Vietnam operations continue to grow while the investments we have made in the United States and Vietnam provide additional capacity as programs ramp. And fourth, the cost actions underway are designed to create greater operating leverage as revenue recovers. Because the timing of new program ramps remains uncertain and we continue to operate in a challenging macroeconomic and capital environment, we are not providing revenue or earnings guidance for the second quarter. So while Q1 was a difficult quarter financially, we believe the underlying demand for our capabilities is stronger than the headline results suggest. Our focus is straightforward: convert that demand into revenue, improve margins, strengthen liquidity, and return the business to profitability.
With that, I’ll turn the call over to Brett.
Brett Larsen (President and CEO)
Thanks, Tony. While we continue to see robust customer demand reflected in our growing backlog, the near-term liquidity challenges across the global supply chain have markedly constrained our revenue in recent quarters. Nevertheless, we believe our operational discipline, strengthened manufacturing footprint, and long-standing customer relationships have positioned us better than many of our competitors. As a result, we continue to win new business and see new programs continue to ramp.
As part of our long-term strategy to improve competitiveness and better align our manufacturing footprint with evolving customer needs, we are currently streamlining our U.S.-based workforce. As Tony noted, this is expected to reduce labor costs by approximately 8 million annually. As you will recall, we previously undertook a significant transformation of our Mexico operations—reduced headcount, streamlined production processes, increased automation, and improved operating efficiencies.
These actions have enhanced our cost competitiveness while preserving the strategic advantages of our Juarez campus, which continues to offer customers an attractive tariff mitigation solution under the USMCA framework. The benefits of these actions are now becoming evident in the marketplace. As our cost structure has improved, we have seen a meaningful increase in customer engagement, quoting activity, and new business opportunities. Our Mexico operations have recently experienced a notable increase in customer visits and qualification audits, reflecting growing confidence in our capabilities and competitiveness.
At a time when many EMS providers continue to face liquidity and capital constraints, our competitive manufacturing footprint is enabling us to compete for a broader range of programs. We’re encouraged by the progress we have made expanding our manufacturing capabilities in both the United States and Vietnam. These investments are a direct response to evolving customer requirements and position Key Tronic to capitalize on long-term industry trends toward supply chain diversification, tariff mitigation, and operational resilience. This investment strengthens our ability to provide U.S. customers with enhanced engineering support, faster collaboration, and increased manufacturing flexibility through a U.S.-based solution.
Customer interest in our U.S. operations continues to grow, and we expect new programs to continue to ramp and existing customers to expand their engagement with us. In Vietnam, we completed a significant capacity expansion during fiscal 2026, doubling our manufacturing footprint to support anticipated growth in medical device and other high-value programs. Vietnam has now emerged as an increasingly important part of our global manufacturing strategy, providing customers with a highly competitive combination of quality, cost, and regional supply chain.
As Tony mentioned, revenues from our Vietnam operations continued to grow sequentially during the first quarter, driven primarily by strong demand in medical devices and consumer-focused programs. We believe Vietnam will be a major contributor to our future growth and an increasingly important differentiator in the marketplace. In an environment where geopolitical tensions, tariff uncertainty, and supply chain risk continue to influence decision-making, we believe Key Tronic is exceptionally well positioned to benefit from customers seeking to nearshore production, diversify manufacturing locations, and reduce overall supply chain risk. During the first quarter of fiscal 2027, we secured new program awards in utilities, power management, sustainable waste management, data centers, construction, and defense technology.
Together, these awards represent more than 60 million in potential annual revenue. We also recently announced plans to partner with TP Link Systems, a global leader in network smart home solutions, to assemble its next-generation technologies in the United States. These wins reflect growing recognition of Key Tronic’s ability to deliver high-quality manufacturing at a globally competitive cost. As liquidity and capital constraints continue to affect the entire EMS industry, customers are increasingly looking for stable, operationally disciplined partners that can support long-term growth. Many of these programs incorporate partnership models in which customers share the upfront investment, helping us balance ramp-up capital requirements, accelerate growth, and improve returns on invested capital. TP Link Systems is one such good example of this approach.
The customer is providing most of the upfront capital needed for production and plans to supply components on a consignment basis. Our strong pipeline of potential new business also underscores the continued trend toward onshoring and dual sourcing of contract manufacturing. As we look beyond the significant transformation initiatives and operational improvements, we believe Key Tronic is emerging as a stronger, more competitive company with several distinct advantages that position us well for sustained growth.
The combination of our optimized global manufacturing footprint, robust engineering capabilities, and vertically integrated manufacturing expertise continues to resonate with both existing and prospective customers and is increasingly translating into new business opportunities. First, we have significantly enhanced the flexibility, competitiveness, and resilience of our global manufacturing network through the actions we have taken to optimize operations in China and Mexico while expanding capacity in the United States and Vietnam. We now offer customers a broader range of manufacturing solutions aligned with evolving supply chain strategies.
As geopolitical tensions, trade policy uncertainty, and tariff considerations continue to influence sourcing decisions, we believe OEMs will increasingly seek manufacturing partners capable of providing geographic flexibility, supply chain resilience, and cost-effective production alternatives. Our investments over the past several years have positioned us exceptionally well to capitalize on these trends. Second, our engineering and design services remain one of the most powerful differentiators in our business model. Many of the programs we win begin long before production, with customers engaging our engineering teams to help develop, optimize, and prepare products for manufacturing. Once a program has progressed from design through commercialization and into production, our deep understanding of the product, the manufacturing process, and customer requirements creates substantial value and fosters long-term customer relationships.
As a result, these programs tend to be highly durable and generate opportunities for future expansion. Given the increasing complexity of many of the products we support, we continue to invest in expanding the capabilities of our engineering organization and expect our design services business to remain an important driver of future growth. Third, we continue to differentiate ourselves through the broad range of vertically integrated manufacturing capabilities and decades of process expertise. These capabilities span across plastic technologies including injection, blow, gas-assist, and multi-shot molding, as well as printed circuit board assembly, metal fabrication, painting and coating, automated high-volume assembly, and the design, construction, and operation of sophisticated test systems.
By providing customers with a highly integrated manufacturing solution under one roof, we help reduce supply chain complexity, lower total landed costs, improve quality, and accelerate time to market. We believe this combination of technical expertise and manufacturing breadth remains difficult to replicate and will continue to distinguish Key Tronic from many of our competitors. Most importantly, these competitive advantages are becoming increasingly meaningful in today’s EMS market. While many providers, including Key Tronic, continue to face liquidity constraints, limited capital availability, and operational challenges, Key Tronic has strengthened its competitive position through disciplined execution, strategic investment, and operational transformation.
As customer demand continues to shift toward partners that can provide engineering expertise, manufacturing flexibility, and global supply chain solutions, we believe we are well positioned to capture additional market share, secure strategic programs, and drive profitable long-term growth for our shareholders. While we continue to face near-term liquidity challenges, our growing backlog, program wins, and pipeline of new business opportunities underscore our fundamentally strong competitive position. While we must navigate the ongoing near-term liquidity challenges, we continue to expect revenue growth and a return to profitability in the second half of fiscal 2027. The global market uncertainties continue to create some delays to new product launches for us, our suppliers, and our customers.
However, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities. Significant improvements in our operating efficiencies are also creating a stronger pipeline of potential new business over the long term. We remain very encouraged that our cost reductions, increased customer-supported capital, and transformation of our global footprint have made us more competitive and increased our potential profitable growth.
This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions.
OPERATOR
Thank you. If you would like to signal with questions, please press star one on your touchtone telephone. If you’re joining us today using a speakerphone, please make sure the mute function is turned off to allow your signal to reach our equipment. Again, that is star one if you would like to signal with questions. And our first question will come from Bill Deselem with Titan.
Bill Deselem (Analyst)
Thank you. Let me start with the industry financing issues since the last conference call. How would you characterize any change that has taken place over that time period?
Brett Larsen (President and CEO)
Specifically to financing? Can you restate that, Bill?
Bill Deselem (Analyst)
Yes, you know that’s exactly right, Brett. Just how the financing environment for the industry and Key Tronic may have changed over the last few weeks since the last call.
Brett Larsen (President and CEO)
Yeah, I think just in broad brush, Bill, I would state that things haven’t improved and in fact they may have gotten even a little tighter. We have seen some of our suppliers in Asia requiring cash up front. I’ve seen some availability of parts being extended, particularly in PCBs and copper and such. So I would say if anything there’s a little more stress in the financing of our supply chain, which resulted in lackluster results in our Q1. And we’ve got to regroup and try to figure out how to best mitigate that and come up with some more unique capital opportunities.
Bill Deselem (Analyst)
Thank you, that’s helpful. And then relative to the six new wins, first of all, thank you for putting in the dollar amount, 60 million. And congratulations on 60 million, that’s a big number. I guess two things relative to these. Would you walk through the story behind those wins and why Key Tronic was chosen and then secondarily for each of them, how is the financing looking like it’s going to line up and how are these customers working with you or partnering with you in light of the tight financing?
Brett Larsen (President and CEO)
Sure. Probably just to start out with, I think there is distress in the market, particularly in North American manufacturing, and I think that has helped us grow recent new wins. And I’ll just start with the first of, you know, the power management new program. That was one that we’ve been chasing for about six to nine months. That particular customer is very concerned about their contract manufacturer and the health that they’re in, and was looking as well to be able to outsource this to a lower-cost region.
So that’s a pickup in Juarez. As far as financing for that one, that’s predominantly a PCBA, which should be pretty much financed by days payable, pretty quick turning, low SKU count. And that customer is providing the capital for its specific production equipment. So I think that’s a good win for Key Tronic moving forward. I think the next was sustainable waste management. And that too has a bit of an uplift in production equipment. And that customer as well has signed the purchase orders to be able to give us the capital to go out and get that production equipment. That one is a little more mechanical; it has sheet metal to it, a little more mechanically aligned. And I think that one as well, the materials are pretty easy to get, highly quick turnover. That one again is a good fit.
Next one is the data centers, and those are existing customers, and those are helping provide some of the parts. So they’re actually drop-shipping some of the components to us and/or helping pay for the materials in order for us to ramp. They’re unique in the fact that they have the supply chain capability. We already have some relationships with some of the supply that we’re getting those parts from, so it’s an easy win for us to ask for some support as they’re ramping to provide some of those components on a consigned basis.
Very little to no increase in production equipment. We can easily digest that data center work into existing capital. That too is in Juarez, but also with some incremental business in Mississippi and Minnesota. Construction, that one is highly engineer-based. They too are paying for the parts up front. That’s more of a consigned basic type relationship. That one’s actually being built downstairs in Spokane until it can launch into full production and we’ll move it into Arkansas.
Last one is this defense technology. We’ve been chasing this one for quite some time. And this too is a consigned material, whereby they are seeking a contract manufacturer that can do ITAR-specific, military-grade spec. And that’s a great win for us down in Minnesota. That’s kind of just a quick snapshot of our sales funnel, and we’re battling through making sure that we use capital in a very strategic sense. We are finding success in still adding on additional backlog and new programs by asking for some support from those customers on the front end.
Bill Deselem (Analyst)
Great, thank you for that level of detail. We really appreciate it. And kind of taking this a step further, historically you all have been cautious that movement in backlog is not particularly something that the street should be looking at. But your backlog was up, I think you pointed out, 76% versus a year ago, 20% versus the June quarter, so just in three months. And in addition to that, you know that we keep track of the trailing four quarters of the new wins announced.
And if you go back to March, you’d had $88 million of new wins over the prior four quarters, and now with the $60 million quarter, we’re up to closer to $150 million. Is this all now something that we should be considering to be meaningful? And if so, how do we look at this meaningfulness in light of the financing challenges?
Brett Larsen (President and CEO)
So I think, Bill, we’ve always cautioned looking at that just because there’s timing differences of when you receive a customer’s, but that much of an increase of backlog is entirely indicative of incredibly strong demand. And I think you’ve also mentioned that we are also accelerating on new program wins. So while we caution you to use backlog as a real measurable instrument as to the health of Key Tronic, I think that much of a change in backlog you have to take a look at and really say there is incredible pent-up demand for production, and coupled with the recent wins but then also the missed revenue that we had last quarter, our customers still need that and of course we’re trying to now move that into this quarter. So all of those things combined I think really share kind of where we’re at is incredibly capital.
That is truly the filter. There’s plenty of demand. We really are, we’ve got to solve some of the capital side and then really take advantage of this burgeoning demand from existing and new customer wins.
Tony Voorhees, CPA (Executive Vice President of Administration, CFO, and Treasurer)
And I’ll just add to that, Bill. This is Tony. You know that backlog is generally comprised of purchase orders and forecasts, but what we’re seeing now is that we’re seeing much more in purchase orders from our customers making a larger portion of that backlog. So that’s why we feel a little more comfortable in that number and the direction it’s heading. It’s more meaningful to us. Part of the tightening and
Bill Deselem (Analyst)
Tony, that’s it. Oh, go ahead.
Brett Larsen (President and CEO)
Just real quick, Bill, part of the tightening of the supply chain has forced us and our customers to make longer-term commitments. So we’re getting more months, more days’ worth of actual purchase orders to go out and drive that very specific component. So that, as well as Tony mentioned, is a larger percentage of that backlog now consists of hard purchase orders.
Bill Deselem (Analyst)
So one additional question and I’ll go re-queue up is kind of to that point of purchase orders being made earlier versus just a brute force increase in demand. How much of the backlog increase do you think has come from purchase orders simply being placed sooner versus what proportion is truly just a meaningful increase in demand?
Brett Larsen (President and CEO)
I would say it’s more meaningful of a true increase in demand. I think the backlog is stronger in its qualitative value because of the peak. Because of the peak. More of that consists of positive. Whereas quantitatively our customers have always given us a 6 to 12 month forecast. We weren’t really clear as to how much of that would convert into orders. So qualitatively I think it even improves the look at the backlog because we’ve got actual orders rather than just a forecast.
Bill Deselem (Analyst)
That’s helpful. I will re-queue up for a few questions after others.
OPERATOR
And once again, if you would like to signal with questions, please press star one on your touchtone telephone. Again, star one if you would like to signal with questions. And our next question will come from Sheldon Grodsky with Grodsky Associates.
Sheldon Grodsky (Analyst)
Good afternoon. Good evening. Are you at your absolute credit limit with your banks at this point?
Tony Voorhees, CPA (Executive Vice President of Administration, CFO, and Treasurer)
We are not at our credit limit currently. You know, we disclosed that in our earnings release and in our Q. We have a $115 million line of credit and we are borrowed to about 85 to 90 of that. So there is room on the line of credit. It’s just an asset-based facility, so depending upon AR and inventory primarily kind of tells us where we can be borrowed to. Does that answer your question, Sheldon?
Sheldon Grodsky (Analyst)
Well, I’m not sure if it answers the question. If you have the extra availability, why can’t you use it? Is it in the wrong place? I’m not sure I fully understand why you’re so capital constrained if you have availability.
Brett Larsen (President and CEO)
Yeah, Sheldon, just to clarify. So we have increased capacity on our line of credit, but of course that is, you know, it’s all based off of assets and the asset-based lending under the existing group. So while there is additional capital available, it’s only if we can increase our inventory or our receivables. So on a week-by-week basis we’re using predominantly 90% of our lending availability. But what Tony’s mentioning, as we grow in revenue, we’re able to take advantage of that through additional capacity.
So week-to-week, availability we’re using pretty much as much as we can use comfortably, but there is more capacity as we’re able to bring on some more revenue. Does that help, Shelby?
Sheldon Grodsky (Analyst)
It may help. I’m just looking at the numbers over the last several quarters and it’s not pretty reading. Are you exploring any other kind of credit agreement with banks to give you more breathing room, or do you just think you’re going to be stuck in this suffocating capital shortage situation for a while?
Brett Larsen (President and CEO)
No, we are aggressively pursuing other capital. One of those is, as we mentioned on the last call, seeking some lending from our international assets. So in Mexico and Vietnam we are seeking some additional financing, and we’ve already seen some success in Vietnam and are pursuing some additional lending on assets down in Mexico. So there we truly anticipate in the coming quarter or quarters that there’ll be some additional financing availability from other sources.
Sheldon Grodsky (Analyst)
Thank you.
OPERATOR
And the next question comes from Bill Deselem with Titan.
Bill Deselem (Analyst)
Great, thank you. Actually, I’ll follow up on that last question. Would you please walk us through the path to revenue growth and positive earnings in light of what you’re looking at for additional capital and how that roadmap looks.
Brett Larsen (President and CEO)
Yeah, just in broad brush, you know, that Key Tronic has plenty of capacity. You know, I look at each one of our facilities, you know, kind of a unique, you know, we’re only using, you know, 50 or 60% of our actual manufacturing capacity. And when I mention that, that really is production equipment and then also footprint. You know, we’ve got ample opportunity to take advantage of these, of new demand and increased existing demand from existing customers.
It all is capital constrained right now. And at the moment we’re able to open up some additional capital. The contribution margin associated with additional revenue dollars is quite substantial. So part of what we’re trying to do, and part of the earnings release mentioned that we’re doing some cost reductions. So we actually ended up taking some headcount as well out of our cost set in order to fully balance. Okay. You know, it’s always a balancing act of how much truly revenue are we going to be able to generate in a quarter and then balance that with your headcount and your manufacturing overhead.
This past quarter we missed. So we’re taking a more conservative look at this quarter and saying let’s go ahead and reduce our headcount and overall cost structure while we’re also trying to grow in these new capital opportunities. Let’s make sure that we are in balance with what we’re actually building today and then possibly bring in some more direct labor at the point in time we get new capital. That’s a long-winded way to say that we really have a volume issue. That’s really what’s driving our horrible results, is that we’re so far underutilized of the actual production capacity that we have able to use.
Bill Deselem (Analyst)
Thanks, Brett. And relative to that streamlining of the US workforce, you may have just answered this question, but I’m going to try to come at it from a slightly different angle. With the backlog up as much as it is, it almost seems in conflict that you would be reducing the US workforce. Unless of course, all that business was headed to V or Mexico or elsewhere. Would you just talk through the metrics and the thought process that you all are working through to solve that riddle of backlog growth versus employment levels in the U.S. specifically.
Brett Larsen (President and CEO)
Yeah, again, it’s a delicate balance at the point in time we’re not generating cash. You know, the very worst thing is to have somebody sit idle, you know, so we’re balancing how much do we expect in actual revenue in this quarter based off of some incremental capital gains, based off of, you know, being able to get the parts timely. And hey, we missed the boat this last quarter. We had too much in manufacturing overhead and even direct labor for the amount of product that we were able to build.
It is that’s probably the most delicate and most difficult thing to be able to pinpoint on a quarter-by-quarter basis, is to make sure that your labor costs line up with the actual production you’re able to achieve. Because we missed $18 million of revenue, we’ve got to align our cost set for what we expect in this quarter, but then grow that over time as we’re solving the capital constraint.
Bill Deselem (Analyst)
That is helpful. And when will those cuts be complete? And the spirit of that question is that an $8 million cost improvement is something in the neighborhood of 70 to 75 cents. And so just trying to understand when that 70, 75 cents annually. And so when that will be fully felt. Is that fully felt here in this quarter or is it some future quarter?
Tony Voorhees, CPA (Executive Vice President of Administration, CFO, and Treasurer)
It’s not fully baked in yet, Bill. I would say about 70% of it is baked in here just a few weeks ago, and we will build in the remaining amount here over periods 5 and 6. So by January, all $8 million of that cost will be out of current labor.
Bill Deselem (Analyst)
Great. Thank you both for taking all the questions and the in depth answers. Appreciate it.
OPERATOR
As a reminder, if you would like to signal with questions, please press Star one, again, that is Star one. The next question comes from Sheldon Grodsky with Grodsky Associates.
Sheldon Grodsky (Analyst)
I’m going to pass on that question.
OPERATOR
Thank you. And that does conclude the question and answer session. I’ll now turn the conference back over to the speakers.
Brett Larsen (President and CEO)
As always, Tony and I appreciate participating in earnings calls. We thank you for your participation today and we look forward to speaking to you again in next quarter. Thank you.
OPERATOR
Thank you. That does conclude today’s conference. We do thank you for your participation. Have an excellent day.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.